Comments from RBC this morning
June 15, 2021
Pembina Pipeline Corporation
Keeping the ball rolling in the right direction
Our view: Pembina's update gives us a greater level of comfort with respect
to our 2021 EBITDA forecast, which is at the high-end of the guidance range
based on commentary with respect to rising volumes. Further, we positively
view the incremental visibility into future growth from new projects (both
recently sanctioned as well as down the road). We believe the release
should satisfy Pembina's own investors given the outlook for both the
base business and pro forma the Inter Pipeline transaction, as well as
putting forward a case for Inter Pipeline's shareholders to consider voting
in support of the merger.
Key points:
Solid volumes through the existing footprint. For the Conventional
Pipelines, Pembina expects physical throughput in Q2/21 to be 3% higher
than Q1/21, and in line with pre-COVID levels, while also expecting physical
volumes to continue to grow through the remainder of the year. The
company cited strong volume trends for the Cochin condensate pipeline,
the Redwater Complex, and at its gas processing plants (specifically noting
Veresen Midstream).
Reactivating Peace Phase IX; other projects remain on hold for now.
Pembina has reactivated its previously deferred Phase IX expansion based
on discussions with its producing customers. The company expects the
capital cost to be $120 million with a projected in-service date of H2/22.
Pembina noted that the Phase VIII pipeline expansion and the Prince Rupert
Terminal Expansion project remain on hold for now with a decision on how
to proceed likely to come in H2/21.
Numerous other projects are being evaluated, but nothing material to
note at this time. Pembina highlighted a number of potential projects
including: (1) a propane-plus expansion at the Redwater fractionator (i.e.,
RFS IV) at a cost of $350 million; (2) an expansion of the Cochin Pipeline
by up to 35,000 b/d at a cost of $100 million; and (3) two potential
cogeneration projects, one at Pembina's Duvernay Complex and another at
Veresen Midstream's Hythe facility. The company estimates potential build
multiples of 5-7x, which we would view as very attractive assuming a high
degree of long-term take-or-pay contracting.
No update to guidance, although Pembina stated it will provide an update
in H2/21. As we previously noted, we did not expect a change in guidance
as part of this release given how early it is in the year. Pembina highlighted
that it will provide an update to its guidance “upon completion of its sixmonth
actual plus six-month forecast, in the normal course”.
Inter Pipeline: with the positive business update and recent share price
strength, we expect Pembina to take a patient approach. At this point,
we do not expect Pembina to increase its offer for Inter Pipeline ahead
of Brookfield Infrastructure's June 22 tender offer expiration. We believe
Pembina's share price strength as well as feedback from its shareholders
will likely result in Pembina taking a patient approach.
Valuation
Our $42.00/share price target is based on an EV/EBITDA
multiple of 11x and includes no upside from the mothballed
growth initiatives. For much of the last 15 years, Pembina’s
shares have traded within a range of roughly 10–13x EBITDA.
We believe a valuation in the lower half of the range is
appropriate given the continued uncertainty with respect to
energy markets. We believe that the relative risk-adjusted
expected total return to our price target supports our
Outperform rating on the shares.
Upside scenario
Our $48.00 per share upside scenario is based on our predownturn
valuation of 11.5x EBITDA applied to our 2022
estimate plus roughly $1.00/share for deferred projects that
have been mothballed in the current environment but could
move forward in the future (e.g., Phase VIII and IX). The EV/
EBITDA valuation is modestly higher than the group average,
reflecting the high proportion of cash flow derived from
the NGL pipeline and terminal infrastructure, primarily under
take-or-pay contracts.
Highlighting its pipeline of opportunities
In addition to the updated and expanded disclosure on several of its projects as previously
noted, Pembina highlighted several other projects and potential opportunities, including what
it sees as being possible through a transaction with Inter Pipeline.
Management sees attractive investment opportunities through a combination with
Inter Pipeline. As previously noted with Pembina’s announcement that it intends to
acquire Inter Pipeline (please click here for details), these opportunities include $450
million of capital project opportunities that could potentially be built at an attractive 4-5x
EBITDA multiple range. This compares to management’s estimated EBITDA build multiples
of 5-7x across many of the company’s other projects under consideration (e.g., RFS IV, a
Cochin expansion, and the additional cogeneration facilities).
o Connecting Cochrane to the Brazeau NGL pipeline. Connecting Inter Pipeline’s
Cochrane Straddle Plant to Pembina’s Brazeau NGL Pipeline system would result in
synergies as Pembina would feed volumes from Cochrane into its integrated footprint
and capture revenues across the value chain. Further, this connection could
ultimately result in propane volumes flowing to Inter Pipeline’s Heartland
Petrochemical Complex, or Pembina’s Redwater Complex or Prince Rupert Terminal.
o FEED study for a potential butane splitter is nearing completion. Pembina sees an
opportunity through a combined platform to have the supply of butane needed to
support the development of a butane splitter in Fort Saskatchewan. Front end
engineering and design (FEED) work for the project is nearing completion.
o Alkylation facility downstream of the butane splitter is under evaluation. Pembina
estimates a capital investment of $400 million to integrate an alkylation facility
downstream of the aforementioned butane splitter, which would be capable of
producing high-octane gasoline blend stock using the alky feed from Inter Pipeline’s
Redwater facility. The project is currently at the pre-FEED stage.
Cedar LNG could be the largest First Nation-owned infrastructure project in Canada.
Although there were no material updates on the project, Pembina highlighted its recently
announced partnership agreement with the Haisla Nation to develop the proposed Cedar
LNG project in British Columbia, which would have liquefaction capacity of roughly three
million tonnes per annum (please click here for additional details on the partnership and
project).
Early days for the Chinook Pathways Partnership. Pembina acknowledged on June 9 that
it had been chosen by the Western Indigenous Pipeline Group to be the industry partner
in a 50/50 venture to evaluate a potential acquisition of the Trans Mountain pipeline
(please click here to read our thoughts from that time). Management noted that it sees
the asset as “a good strategic fit – under the right circumstances”. Key factors for Pembina
as it evaluates the merits of a potential investment, among others, include: (1) the
construction of the Trans Mountain Expansion being fully de-risked; (2) compliance with
Pembina's financial guardrails, including a strong BBB credit rating; and (3) the investment
creating significant value for investors. Please click here to read our update from April
with Trans Mountain Corporation’s executive team on the pipeline project’s status.
Investment summary
We expect Pembina’s shares to outperform its peers for the
following key reasons:
• The Inter Pipeline transaction makes sense from an
industrial logic and numbers perspective. Particularly
looking at the NGL assets and the Heartland Petrochemical
Complex (HPC), the strategic fit of Inter Pipeline's assets
with Pembina's footprint has the ability to drive revenue/
commercial synergies. In particular, we see the potential to
optimize flows and capture additional customer volumes
from the ability to offer multiple services (e.g., access to HPC
as part of the marketing pool). From a numbers perspective,
the transaction keeps Pembina within its financial guardrails
and we also estimate that the transaction will be
immediately accretive to AFFO/share.
• We see asset sales as a way to take the Inter Pipeline
transaction from good to great. We believe the transaction
provides Pembina with a suite of asset monetization
candidates that could have the multi-faceted benefit of:
(1) putting any concerns about credit to rest by reducing
leverage; (2) highlighting an attractive valuation marker for
the remaining assets; (3) improving the returns on capital
employed; and (4) increasing the growth rate by monetizing
low growth, or declining, assets. Specifically, we highlight
the oil sands pipelines, which could be partially or fully
monetized, and in particular the high-leverage, low-return
Corridor pipeline system.
• Potential catalysts. Clarity on the process to close the Inter
Pipeline transaction; improved investor sentiment towards
energy and midstream stocks; additional volumes for the
conventional pipeline system; government programs that
strengthen oil and gas producing customers; increased
Montney producer activity on the back of the sanctioning of
the third-party LNG Canada project.
Risks to rating and price target
Risks to our price target and rating include: (1) actual
economics for the Inter Pipeline transaction being materially
different from our forecast, (2) the impact of COVID-19
and a weak market for energy including lower-thanexpected
throughput on the pipeline systems, (3) regulatory
intervention, (4) the ability to complete new projects on time
and on budget, (5) operational issues, (6) reduced margins in
the midstream and marketing segment, and (7) acquisitions,
investments and/or projects that fail to gain the confidence of
investors.